Problematic Cash Solutions Is Islamic Finance

cOvER

sTORY

Business islamica magazine

By Adil Msatfa

Problematic cash solutions

despite the ControVersy, tawarruq remains shari’ah sCholars’ prerogatiVe.

Eventhough the global Islamic finance industry is gaining more and more acceptance from both Muslim and non-Muslim investors, many challenges remain towards unifying standards. As a matter of fact, we are still witnessing some product names having utterly different meanings from one region to another, and we still can see some products considered as Halal by some scholars and declared impermissible by others.

ne of these financial products that is creating confusion in Islamic finance nowadays is Tawarruq, also known as commodity Murabahah. Tawarruq is a mode of finance that involves a tripartite sale contract whereby one party buys an asset from a vendor using a deferred payment scheme and then sells it to a third party for cash at a price that is lower than the deferred price. This mode is very popular within bankers as a rapid and flexible way for acquiring liquidity. In fact, by using Tawarruq, bankers could avoid many constraints related to capital adequacy

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Before taking a look at the arguments of proponents and opponents of that practice, we should first differentiate between different types of Tawarruq. The first type is the “Real Tawarruq” which happens when a person (Mustawriq) buys a commodity from a bank at a deferred price and subsequently sells it to another party or bank for cash, in order to get his needed liquidity. The second type is “Organized Tawarruq”, also called “Banking Tawarruq”, which is practiced when a person buys a commodity from a bank on deferred price basis and the bank arranges the sale agreement either by itself or through an agent. The Mustawriq and the bank execute, simultaneously, the transactions, usually at a lower spot price. The difference between the two types of Tawarruq is that the customer in the organized Tawarruq does not receive the...